Pressure on for 0.5% rate rise as US industrial output surges

Click to follow
The Independent Online

The odds of a half-point hike in US interest rates - the first for five years - shortened yesterday after industrial output surged at its fastest rate for almost two years.

The Federal Reserve meets today against a background of strong growth, a tight labour market, rising oil prices and booming consumer spending. A hike in rates to 6.5 per cent would take them to their highest level for almost 10 years.

Figures from the Federal Reserve yesterday showed industrial output rose 0.9 per cent in April against 0.3 per cent in March and a forecast of 0.7 per cent. It is the highest monthly rate since August 1998, when it rose 1.8 per cent.

"There is no sign of a slowdown," said Wayne Ayers, chief economist at Fleetboston Financial. "It confirmed what the market has been anticipating - a full half-point rate hike."

This would also mark an end to the cautious policy of quarter-point hikes that the Fed has adopted since the middle of last year.

Another worry is the oil price, which has risen in recent weeks despite the agreement by Opec to increase output. Analysts fear that the so-called "driving season" in the US - where millions of Americans take to the roads for their summer holiday - will lead to a surge in demand.

One economist said recent history showed that a half-point rise would be the signal for a series of hikes until there was evidence that inflationary growth had been curbed.

Nick Stamenkovic, senior bond analyst at IDEAglobal.com, said the most recent half-point hike in 1995 was the last step in a severe tightening of monetary policy that saw rates rise from 3 per cent to 6 per cent between February 1994 and February 1995. "When the Fed starts to move aggressively, it means to maintain it," he warned. "If they move by 50 basis points then the market will expect another 50 the month after that and the month after that."

The financial markets have priced in a 0.5 per cent hike, but Wall Street will be anxiously watching for a statement from the Fed after the meeting, which is likely to signal worries over inflation. Mr Stamenkovic added: "The equity markets are hoping that 50 basis points will be the end of the interest rate cycle but the chances are that the statement will point to further tightening in the pipeline, which will create a difficult outlook for equities."

Comments